RFID Industry Reaction to Checkpoint-OAT Deal, Part 2

In the two weeks since Checkpoint's $37 million acquistion of OATSystems was announced, there has been a flurry of commentary about what it means for the players involved and the RFID industry at large. Today is the second of a two-part series featuring the best of that commentary.

July 8, 2008—Two weeks ago Checkpoint Systems, a leading provider of electronic article surveillance (EAS) and related anti-theft solutions to retailers, announced that it would acquire OATSystems, a pioneer in the middleware category that evolved into a provider of application- and vertical-specific RFID software (see Checkpoint Buys OAT to Become One-Stop RFID Shop). Not announced in the original release, the $37 million acquisition price was subsequently published in a Checkpoint filing. In the two weeks since the deal was announced, there has been a flurry of commentary about what it means for the players involved and the RFID industry at large. Following is the second of a two-part series featuring the best of that commentary. Also be sure to see yesterday's RFID Industry Reaction to Checkpoint-OAT Deal, Part 1.

The End of Middleware, Sort Of

OAT pioneered RFID "middleware," a moniker for the software that integrates RFID readers with the ERP system where the RFID data is ultimately stored. Depending on the particular product, middleware capabilities ranged from filtering, cleaning, and processing data, to managing a network of reader devices, to executing business logic against the data and events generated by the readers.

While all of these functions are no doubt valuable and necessary, most in the industry predicted that standalone software to perform them was overkill, and that eventually such functionality would be subsumed by ERP software from the likes of SAP, BEA, etc. For the last couple years, therefore, "middleware providers" as a category of RFID vendor was expected to simply go away as those companies either sold themselves, went out of business, or diversified or repositioned their offerings. And indeed, OAT's path -- evolving from pure middleware provider to vertical RFID software solution provider, then acquired by a much larger company -- seems to validate these predictions. As AMR's John Fontanella put it in his analysis of the deal, "OATSystems' fate was sealed from its inception."

Reik Read, the RFID industry financial analyst with Baird and author of RFID Monthly, was reluctant to call OAT's sale the absolute end of middleware because, he pointed out to RFID Update, "What these companies provide is certainly of value. The question is only what form that takes." That is, all of the historic functionality of RFID middleware will live on, but not in the standalone software packages it once did. Mike Liard of ABI Research calls it the end of the middleware category, not of middleware itself.

Behind the Scenes

According to industry sources, OAT was at a point to seek another round of funding from investors, who instead encouraged the company to explore a sale. Six companies were reportedly interested enough to bid for the company: Checkpoint, Zebra, Tyco ADT, Intermec, IBM, and Oracle. IBM and Oracle moved too slowly, say sources, and were not frontrunners in the bidding.

A couple years ago there had been strong speculation that IBM would acquire OAT. The two companies had partnered and were working together on numerous projects. Obviously that didn't come to pass. Liard surmises, "There was no urgency on IBM's side to make a strong move on OAT given the strength of the present relationship and complementary nature of the organizations and their offerings."

$37 Million. Is That a Lot?

Insiders tell RFID Update that OAT did between $3 and $5 million in revenue in 2007, which puts the acquisition price at around eight to ten times trailing revenue. (Note that the "soaking wet" price was closer to $45 million because of an additional $8 million for certain OAT leadership to incent them to stay on board.) An 8-10x valuation is good but not "off the charts," says one source. Ultimately, though, "the founders and VCs are happy."

Also important to note is that OAT could be on track to do $8 or $9 million this year, so the $45 million price likely had less to do with historic revenues and more to do with capturing growth. "All of the bidders were looking for market leadership and market vision, and a go-to-market capability," says one source. Revenues were secondary.

The First of Many?

Whenever a major RFID acquisition happens, the industry wonders if it marks the beginning of a trend. This time is no different. "Is this the start of a feeding frenzy?" wrote ODIN technologies CEO Patrick Sweeney on the company blog. "In a word - yes...Small and mid-cap companies who want to be serious players in the RFID industry will buy [RFID software and solutions providers] this year."

ABI's Liard acknowledged the possibility of more M&A, but noted that the industry's recent history told a different story: "Neither the 2004 acquisition of RFID innovator Matrics by Symbol (since acquired by Motorola) nor the 2005 acquisition of RFID software company Connecterra by BEA (since acquired by Oracle) triggered other acquisitions. Potential acquirers have to not only see a compelling need, but also be willing to make a sufficiently generous offer to convince the target company's investors."

Who Could Be Next

If more acquisitions were to occur, who are the likely targets? Think small, young companies that have carved out a strong niche and/or leadership position. Candidates would probably also have some sort of revenue-generating software offering since, if there is enough demand, selling software is a highly scalable and profitable business model. ODIN and Xterprise are possibilities. Liard also names Vue Technology, Acsis, and GlobeRanger. The latter is the last of the original "middleware" companies, though like OAT, it shed that classification well over a year ago and repositioned itself as an "edgeware" provider.

Conclusion

There appears to be industry consensus that Checkpoint's acquisition of OAT simply made sense. Checkpoint added much-needed software to its portfolio to fortify and expand its value proposition to retailers. OAT obtained financial security in the arms of an 800-million-dollar parent, while yielding its founders and investors a nice payday. And the middleware vendor category, long predicted to dissipate into other areas of the RFID value chain, finally did just that.

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